Wells Fargo Says $50B Reynolds American Merger Could Spur More Tobacco Deals
British American Tobacco (BTI) secured a deal to acquire Reynolds American (RAI) this morning with a sweetened $49B offer, leading research firm Wells Fargo to argue that the creation of the world's largest tobacco company could spur Philip Morris (PM) to launch its own bid for Altria (MO) as the industry races to scale up.
BAT WINS REYNOLDS WITH SWEETENED BID: Tuesday morning, Reynolds American announced that British American Tobacco will acquire the remaining 57.8% of RAI it doesn't yet own for $29.44 per share in cash and a number of British American ADRs valued at $30.20 per share. The transaction is expected to close in Q3. "Through this transaction, we form an industry leader that will focus on innovation and brand building. This combination will create a truly global tobacco company with multiple iconic tobacco brands, and a world-class pipeline of next-generation vapor and tobacco-heating products," remarked Susan Cameron, executive chairman of Reynolds. The companies added that British American "remains committed to Reynolds American's U.S. workforce and manufacturing facilities." Tuesday's agreement follows a bid from British American in late October that valued Reynolds at $56.50 per share, of which $24.13 was to be in cash and $32.37 was to be in BAT shares.
WELLS FARGO SEES INDUSTRY CONSOLIDATION: Weighing in on the deal, Wells Fargo's Bonnie Herzog argues that the news "likely" raises the probability of a tie-up between Philip Morris and Altria, with scale becoming "increasingly critical as the industry consolidates." Herzog adds that she doesn't expect Philip Morris to "sit idly by" as British American becomes the world's largest tobacco player, and she notes that the 16-times takeout multiple of this morning's deal suggests Altria is worth "at least" $76 per share. On the Reynolds American transaction specifically, the analyst says the revised bid is at the lower end of historical "bump-ups," but she believes it makes sense given British American's existing stake and the strength of its initial offer. Herzog argues that the deal should be approved "relatively quickly" due to a lack of direct overlap, leading her to reiterate an Outperform rating on Reynolds.
PRICE ACTION: Reynolds stock is up $3.1% to $57.72 in afternoon trading and British American shares trading in New York are down 1.85%. Philip Morris and Altria, meanwhile, are up 2.1% and 1.1%, respectively.
Disclosure: None.